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Eye On Sci-Fi Book Review: The Fear Index, by Robert Harris

This week’s Eye On Sci-Fi is The Fear Index, by Robert Harris. Toted as a “Thriller”, this amazing read definitely falls into the Sci-Fi realm with its meditations on Artificial Intelligence and mad physicists.

Let me start off by saying that this novel is one of the best works to pull off A.I. as it might actually occur in real life, if it occurs at all. Why would I be so bold as to say something like this? Well, the whole premise of emergent AI in The Fear Index is based on a genetic algorithm gone haywire. A genetic algorithm, in layman’s terms, is a search heuristic that mimics the process of natural selection. That’s right, an algorithm that can learn and essentially evolve. GAs are already in use and have been for quite some time.

In The Fear Index, a GA is devised by the main character Alex Hoffmann, a genius physicist, and let loose on Wall Street with the guidelines of measuring the VIX (an actual index that is supposed to measure the levels of fear in the markets) and to adjust accordingly to place bets for Hoffmann’s hedge fund, thereby making bundles of cash off of everyone’s market fears.

The VIXAL-4 as it is called, does a splendid job. A little too splendid. In fact, it seems to be evolving and exhibiting patterns that point to intelligent motives. Don’t worry, I won’t spoil the thrill ride that this book gives. Let me just say that the premise of this novel is, in my opinion, very plausible.

Wall Street is already running on high-frequency trading, measured in nanoseconds, with algorithms essentially already in control of that megalithic casino. If you can remember back to May, 2010 (I know, so long ago) and the Flash Crash that happened then when the DOW plunged 1000 points only to recover the losses in minutes, that whole rollercoaster ride was caused from an algorithm. From The Economist, Oct 1. 2010:

The main trigger for the sudden decline, the report suggests, was a large sell order in “e-mini” futures on the S&P 500 index by an unnamed mutual-fund group (reportedly Waddell & Reed). Because this automated “algorithmic” trade was programmed to take account of trading volume, not price or time, it was executed unusually rapidly: in 20 minutes, instead of the several hours that would be typical for such an order…Ten minutes later, however, they began forcefully selling to reduce their “long” positions. The sell algorithm used by the mutual fund responded to this increased volume by increasing the rate at which it fed orders into the market, creating a feedback loop.

By that time, the problem had escalated out of human hands.What has been done about this problem? Not much. Expect more flash crashes to come.

It is in this world, the fantasy world of Wall Street where profit is measured in fractions of a penny traded in nanoseconds by computers that have no human mediators, that The Fear Index takes place. How did Wall Street get like this? Well, as technology has advanced, so has the computer systems on Wall Street. Top-notch physicists, nicknamed “quants” on Wall Street as in “quantitative analysts”, are given top-notch paychecks in return for their expertise. And where the money is, so is the funding. These quants and hedge funds are in a race with one another to develop the perfect get-rich-quick algorithm, and this is happening as we speak. Little do they think of the consequences however, as we’ve seen from 2008.

Check out the book to see what could be in store. It’s not exactly something that will lull you to sleep….